UPDATE 1-Spain's DIA rebounds on signs of sales recovery

* Shares up 8 percent after losing 50 pct this year (Writes through with details on guidance, shares)

By Julien Toyer

MADRID, July 26 (Reuters) - Shares in Spanish food retailer DIA rebounded on Thursday as the market took some solace from improved sales at the start of the second half of the year after the group abandoned over-ambitious full year targets.

Discounter DIA, which faces tough competition in its home Spanish market from local heavyweight Mercadona and rivals such as Lidl and Adli, gained ground during an economic crisis which drew more cash-strapped customer into its stores.

But it has been struggling to find the right strategy now that the country’s economy is rebounding strongly. The group has lost more two third of its market value since a 2015 peak.

At first glance, an earnings report on Thursday made for grim reading.

DIA dropped an ambition of growing its EBITDA (earnings before interest, tax, depreciation and amortisation) in 2018 in Iberia. Instead it expected a decline in EBITDA margin in the third quarter but an improvement in the fourth quarter.

It also changed its guidance on emerging markets from “expansion acceleration” to “more cautious approach to expansion in Argentina”. Finally, it said cash flow from operations would be below 2017 levels compared to a previous objective of a double-digit growth.

There were some crumbs of comfort ahead of a new strategic plan due in October.

Spanish sales were up 3 percent in July as a result of improvements to its stores, while sales also improved in Brazil, where results were hit in the first half by a transport strike.

The group, which also operates under brands La Plaza or Clarel, said new local shops in Iberia such as Dia&Go were delivering good results.

DIA’s CEO Ricardo Curras told analysts on a conference call it had made progress towards signing new procurement alliances although he declined to give any further detail.

Shares rose as much as 8.4 percent as they regained some ground after a 20 percent fall over the last month and a 50 percent loss so far this year.

The move was also influenced by short sellers who bet on a stock falling. Short selling positions in DIA were worth 17.28 percent of its share capital according to the latest data published by Spanish market watchdog CNMV on July 20.

“The results are very bad, even worse than what we expected, but it seems the July trend is better and that the second half could see some improvements,” said a Madrid-based trader.

“On top of that, we also have a date for the new strategic plan in October and at the current trading levels, one can assume all the bad news have been priced in,” he also said. ($1 = 0.8527 euros) (Additional reporting by Anita Kobylinska, Tomas Cobos and Emma Pinedo Editing by Keith Weir)